JP FORD
SVP and Director, Business Development
Lodging Econometrics
Portsmouth, NH

MITUL PATEL
Chief Operating Officer
Peachtree Hotel Group
Atlanta

RON BURGETT
EVP, Franchise Development
WoodSpring Suites LLC (formerly Value Place)
Wichita, KS

GERALD CHASE
President and COO
New Castle Hotels and Resorts
Shelton, CT

R. MARK WOODWORTH
President
PKF Hospitality Research
Atlanta

CHRIS PFOHL
SVP, Acquisitions and Business Development
Pyramid Hotel Group
Boston

(Moderator, not pictured)
SULE AYGOREN
Editor-in-Chief
ALM Real Estate Media
New York

Read on for what these experts had to say…

SULE AYGOREN: For the past several quarters, the hotel sector has been seeing record-breaking performance and profits. Many people think this will continue at least through mid-2016. What are you seeing?

CHRIS PFOHL: Pyramid has approximately 60 hotels across the US, and we operate in every segment. Same-store NOI grew 18.8% in 2013 and 31.4% in 2014. We are forecasting similar levels of growth in 2015.

GERALD CHASE: I've been through several recessions but this one has been more interesting. The economy has recovered slowly but for our industry it's been a steady recovery over the past seven years. I don't see a lot of clouds in the sky over the next year. We're seeing new development—at least in the pipeline—in some markets with strong growth, stable occupancy and high rate growth. But overall, the market is strong and that will continue.

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MITUL PATEL: Some smaller rural markets are tapering off in terms of growth but we're seeing a lot of both demand and ADR growth in major markets, so supply growth is inevitable so long as barriers to entry are low. This time around it is a little more balanced because lenders are more in tune with proven brands and they carefully evaluate the sponsor's track record as well as their global cash flow situation.

RON BURGETT: All of our direction is to go forward with our WoodSpring Suites brand, but each Value Place will move over and rebrand. We've seen double-digit increases in the last two years; I expect the same this year. Our space is a little underbuilt. We're in the extended stay, what we call upper economy/lower-midscale space. We'd like to have folks start talking about the value segment. So we're trying to create our own segment because we compete well in markets that are higher end, but we're still the value option in that market. So we expect to continue with that. We're having record numbers. Last year, we added 40 properties and signed 40 agreements for properties now under construction. It's been a good opportunity for us to find a niche without a lot of competitors.

CHASE: We have two to three years left in this cycle. We'll see continued uptick in the pipeline but in a measured way.

JP FORD: As far as new supply is concerned, we are not even close to the last cycle's peak in the second quarter of 2008, which was about 5,800 projects and about 785,000 rooms. Today, we're only at 3,885 projects with about 488,000 rooms. There's a lot of money available and a lot of transactions happening. We expect that to continue. Overall we are in a good spot.

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MARK WOODWORTH: While the tenor is clearly positive, there are markets to be concerned about just as there are markets where significant opportunity remains. If you look at smaller markets—particularly interstate locations—many are lagging well behind virtually everything else. Much has to do with the nature of the observed employment recovery and population migration trends. Sun Belt cities are attracting labor because that's where the jobs are—it is a virtuous cycle. We see significant hotel development in places like Austin, which happens to be a market we are concerned about. There could be too much new supply too soon. Across the industry, we see that prices are now getting back to previous peaks. Profits will get back to previous peaks sometime next year. We're a little more bullish on RevPAR growth next year than we were. We were predicting 6.3%, now we're saying 6.8% for 2016.

PFOHL: Considering the overall economy and economic forecasts such as PKF, we continue to be optimistic. Over the last 18 months we have been looking at new development opportunities. We are conservative with our approach toward new development coming off the last cycle. Our current pipeline primarily consists of upscale extended-stay product in high barrier-to-entry markets. For example, we're developing a 300-room extended stay hotel in Berkeley, right by the University of California and others at Johns Hopkins University and the University of Arizona. We like university markets because the markets traditionally perform well in all economic cycles.

CHASE: Isn't it partly because the funds that started a few years ago have matured? I don't see the funds being less bullish; I see them as bullish as they've ever been but there's some cycling going on.

PFOHL: It's becoming more challenging to find acquisitions that make sense. Markets such as NY are experiencing new supply issues combined with other economic conditions such as changes in currency rates and Airbnb product hitting the market.

AYGOREN: Supply is not yet an issue unless you're in specific markets like New York, where there's a crane on every corner. Are there any problem spots for you in terms of development?

CHASE: We're more of a niche developer. Even in the markets where there would be quite a bit of supply coming in, if there's a particular site or a product that would serve that market well, we'd still be interested. We're looking at markets, including tertiary locations, that companies are moving to where the future looks bright. So it's not a restriction. Some of our returns are better in secondary markets where there's support—like a new major company or a new manufacturer being transferred into the market—and maybe the labor costs are high. Those look very attractive.

FORD: In the US at the end of Q1, we had seven big markets where the pipeline represents over 20% of the current supply of rooms—markets like New York, Miami, Houston, Seattle, Boston, Austin and Pittsburgh. We are poised to see a lot of growth in those markets and a lot of the development that is currently taking place in those markets is in the upscale and upper midscale chain scales, commonly known as select service. We expect those two to be dominant over the next couple of years.

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BURGETT: We're exclusively new construction. Our biggest challenge is finding great real estate. In the HBTE markets, hybrid markets, it's very difficult to find something that makes sense. We're in the suburbs because the city center is not really where our product fits, but for the first time we're moving into Denver and Chicago. So you've seen the evolution of our company.

PATEL: There isn't a market we're hesitant about because of development. Nashville and Charlotte are two strong markets that have seen robust demand and correlating rate growth. We'll probably stay away from the markets where ADR isn't strong. The first thing we look at is demand growth and then balance that outlook with rate stability. We're also teaming up with municipalities that have economic development plans to do public/private deals. In the end we are buying, selling and developing.

AYGOREN: Is anyone focused on reconfiguring their portfolios or being a net buyer, as opposed to a net seller?

PFOHL: We just closed a deal on seven Marriotts in the central part of the US. We're seeing some moves by private equity investors into those markets. With these seven Marriotts, we're buying way below replacement costs in cities where there is a solid economic story. It's an interesting deal when you can buy completely renovated full-service, upscale hotels significantly below replacement cost in markets with relatively strong rate growth and no substantial supply issues.

There's incredible competition for new deals in the US. So about a year and half ago, capital pushed us toward Europe and we recently opened an office in Dublin and have completed our first acquisition there. Dublin has extremely strong market growth. It had the highest RevPAR growth in Europe last year and 27% RevPAR growth in the first quarter of this year. In addition we recently assumed management at two hotels in Manchester, UK with another capital partner that we have traditionally worked with in the US.

WOODWORTH: Is that the Pyramid influence?

PFOHL: Yes. Pricing in Paris and London is crazy, but in some of the other European markets you can actually buy assets at levels that make economic sense.

CHASE: We have seven properties in Canada that served us very well. We looked at Europe but we had a challenge because the investment model is different than it is in the US. You have a lot of long-term leases on the land and they perceive things differently than we do.

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PFOHL: That's why we went into Dublin first, where we saw similarity in business cultures. We have found that the management companies there generally don't have the same level of sophistication—as it relates to systems such as accounting and revenue management—as companies in the states do. We have aligned ourselves with an Irish management company that does business throughout Europe.

FORD: Investors are working to round out their portfolios as we advance toward the top of the cycle. We expect to see more transactions over the next year. Cap rates will remain relatively stable.

AYGOREN: In terms of acquisitions or new projects, what are your sweet spots?

CHASE: Our wheelhouse is historic properties in key markets, or even secondary markets, that need to be redeveloped. Bringing in a soft brand has worked very well for us. We also like the secondary markets for a convention hotel that is owned by the state or city where we can add a product with the right amenities.

PFOHL: In top 10 urban markets like Boston, where center city office rents have substantially increased, we have seen a push for hotels in high quality suburban markets. However our traditional sweet spot continues to be full-service independent and branded upscale hotels and resorts in top 25 markets and resort destinations.

BURGETT: We're probably a lot different than everybody else here because our customers stay 30 days at a time, on average. We're somewhat of a hybrid, if you will, between an apartment and extended stay product but, in general, we don't typically follow cranes; we follow bulldozers. We go with markets that are building new homes. We're right in the center of the country, 10 years of growing from Texas to Michigan. So we love Denver, South Florida.

PATEL: In terms of sweet spot, it's all of the above. Take Downtown Atlanta. There's a convention center, multiple sporting event venues, tourist attractions and office. We also favor metro-suburban markets because we see seven days of business in those markets versus some predominantly office markets where weekends are slow.

AYGOREN: Who's your biggest competition for deals and how are you standing out?

PATEL: REITs are primarily our competitors on the buy side. They pay higher prices for assets because they have lower cost of capital but we've been successful on the off-market side. We've formed direct relationships with various hotel ownership groups, be it regional owners or institutions, which led to direct buys with other groups, including lenders, asset managers and servicers.

BURGETT: For us, it's more fighting the real estate piece against a retailer like a Subway or a Cinnabon. Those guys are taking up all the great sites.

AYGOREN: As in the kind who would do a net-lease?

BURGETT: Yes. They're either leasing it or they're building it out. We need those type of high visibility. Subway stores used to be in strip malls but now you're seeing them freestanding, taking up great sites.

PATEL: Multifamily has been killing hotel developers in core markets.

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PFOHL: Pyramid has traditionally had strong relationships with REITs and traditional private equity firms. Over the past two to three years, we developed strong relationships with Chinese and Asian investors. We currently manage several hotels for Chinese owners. We have found that the best way to stand out and distinguish ourselves is simply by developing and executing creative business plans that continue to add value to the hotels we manage.

FORD: People are working to round out their portfolios as we get toward the top of the cycle. We expect to see more transactions. Cap rates will stay where they are or come down slightly because of that.

WOODWORTH: In terms of operations and market share, the thing that's interesting is Airbnb. If my memory is correct, in 18 of our 59 cities, the supply of Airbnb hosts is greater than 5% of the traditional hotel supply.

PFOHL: Mark Woodworth did a presentation on Airbnb in our offices and the conclusion was “maybe it's not having a substantial affect now, but wait until the next downturn when occupancy starts sliding and you have substantial Airbnb product out there.” However, in the past 60 days we have seen an increased impact from Airbnb in markets such as Hawaii and NY.

CHASE: Airbnb does not play by our rules. They do not have to have security or our standards on life safety or service. That's an unfair advantage but I'm not afraid of it; it's a great thing to try. It's youthful and it means trying new things. These travelers want something that's a unique experience, but I'm not sure it's a long-term trend.

PFOHL: I live in the South End of Boston, and walking to work in the morning you start to see travelers walking out of apartments with a tourist map in their hands. They are Airbnb customers and they're not just younger people. There is a misnomer that it's all young people. Airbnb's recent national advertising campaign appears to attempt to attract people of all age levels.

FORD: As word starts to get out, people get on that site and they start booking things and having great experiences, then you are in a different situation.

PATEL: It's a disrupter like Uber was to taxis. Some customers want to find that unique experience, but they might be looking more for consistency, which yields back to the brands because what if the pillows are crap, and the bed is shaky? There's probably no quality control systems.

CHASE: But if travelers have bad experiences like that, it will fix itself very quickly. We're concerned about all competitors. When I see Airbnb, I get back to one basic point: if we're fighting for demand, there needs to be at least some similar rules and we need to make sure our customer stays safe. We're expected to do that and I expect others to do it too. We talk about Airbnb like it's going to do the industry in. What will do us in is us not innovating and targeting the customer to find out their needs.

BURGETT: Airbnb is a result of not enough building going on between 2006 and 2009. But if the economy gets a little tighter, travelers are going to come back to hotels. They're going to want their points and to go to the brands.

AYGOREN: Are Millennials as big of a deal as they're being made out to be, or is there too much of a knee-jerk reaction in the industry, in terms of catering specifically to them?

PFOHL: Understanding how Millennials think and select hotel product is critical. In many ways, it's all about trying to create relevant social interaction and Facebook/ Instagram moments for them in their hotel and travel experiences.

FORD: We talk about them being highly educated and not rich yet, but it's not a knee-jerk reaction. They are a big target market for our industry and our industry will cater to them from a brand and experience point of view.

BURGETT: They want simple, now, but they don't want to pay for things they don't need. Seeing that is going to help us be better operators and control more costs.

AYGOREN: We see a lot of revamps and renovation. Is anyone else doing it, or seeing more of that in the industry?

PFOHL: We support and like the Marriott Great room concept in their hotels. They activate the hotel experience, create social interaction, and drive F&B revenue. It's not unlike the Starbucks “alone, together” concept. If you implement that Great Room concept properly in the right markets, it really does begin to appeal to a cross-section of customers, such as Millenials and corporate as well as leisure travelers.

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PATEL: We're doing it with the Hampton FYI Initiative, Forever Young. It goes back to efficient, functional, and affordable, we can stretch that word. We're probably about six to eight months away from starting to see these things come on line from a functional perspective in the rooms and brandwide.

BURGETT: Changing our name was pretty drastic. We did it to get to a higher value guest with the same product.

CHASE: With some of the upgrades, it's the amenity creep that we sometimes see when times start getting really good. We sometimes do it for our own taste but now hoteliers are doing it for the customer and when we do that, our chance of success is much better.

AYGOREN: A year ago at this meeting, the participants agreed that development was a concern, but not a problem yet and wouldn't be for a couple of years. But we're close to that now. Capital in the hotel market was expected to remain plentiful—we saw that in the recent surge of CMBS issuance in the hotel sector. Where do you see yourselves and the business a year from now?

CHASE: One year from now, we'll see the most transactions in the industry's history. Next year we'll still be saying that 2017 is going to be a good year.

PATEL: From a RevPAR standpoint, we will be pleased with the year prior's results. We'll be talking about stronger ADR growth.

FORD: Barring anything unforeseen, it will be one of the best years the industry has ever had. Nationally, we are looking at a supply increase this year of about 1.5% to 1.6% and 1.9% next year, which is still well below industry averages. But I caution people to pay attention to their own markets of interest. Everybody wants to talk about new supply in a macro sense but as an owner, developer or investor you must have local perspective and be aware of all hotel real estate activity surrounding your assets so you don't get surprised.

BURGETT: New construction across all channels will be very strong because interest rates still are in check—though they may be slightly up—and construction costs are evening out.

PATEL: A lot more portfolio trades will be happening.

AYGOREN: Do you think a record will be set?

PATEL: Yes, especially in the big tranches.

CHASE: It's timing. If you think about it, it's the maturity of some of the funds. They have to move product at the timing of that cycle. So you're going to see active buying and selling next year.

PFOHL: We are generally very optimistic and bullish about the industry over the next 24 months. It will be interesting to see how external factors such as currency exchange rates, Airbnb, and living wage affect markets and profitability. Pyramid continues to have aggressive growth initiatives across US and European markets.

WOODWORTH: There are 28 cities that will have a year-over-year decline in occupancy. But the revenue side will continue to be favorable and fundamentals will stay strong so the mindset needs to shift to how to better manage costs. It's gone from “we know what you want so we'll provide it to you” to “wait a minute, we need to make sure we understand what the customer really wants and that we're delivering it.”